December 9, 2022 In Consultancy, Advovacy, Legal Support

How Do Franchisors Make Money 2023 – Complete Franchising Guide

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How Do Franchisors Make Money? This blog post will explore further into “How Do Franchisors Make Money” and what their business model looks typically like.

Franchisors make money in a few different ways: through initial franchise fees, ongoing royalties, and sometimes even from selling products and services to franchisees.

They may also make money from interest on loans or investments made by franchisees. So, if you’re considering franchising, now you know more about how the franchisor makes money.

Check out our Franchising Guide for more franchising information.

Phone: 289-816-CYPR (2977)
Fax: 289-312-CYPR (2977)

Email: sanchita@cypherlaw.ca

Office: 755 Queensway East, Suite 202, Mississauga, ON

How Do Franchisors Make Money with Royalties

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So How Do Franchisors Make Money through royalties?

To make money, franchisors charge a royalty fee to their franchisees. This fee is typically a percentage of the franchisee’s gross sales. It is paid regularly (usually monthly or quarterly). The royalty fee goes towards running the franchise, including marketing, research and development, and support services.

The royalty fee can vary depending on the type of franchise but is typically between 4% and 8% of gross sales. Some franchises may have a lower initial royalty fee, but it will increase over time. For example, McDonald’s has an initial royalty fee of 2.4%, which rises to 4% after the first year.

Franchisors may also charge other fees to their franchisees, such as an advertising fund fee or a grand opening fee. These fees are generally in addition to the royalty fee. They cover specific expenses related to marketing or opening the new franchise location.

How Do Franchisors Make Money With Franchise Fees

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How Do Franchisors Make Money with franchise fees?

Franchise fees are one of the primary ways that franchisors make money. You typically pay an upfront fee and ongoing royalties when you purchase a franchise. The upfront fee covers the costs of setting up and operating the franchise. At the same time, the royalties are paid periodically (usually monthly or quarterly) and are used to cover ongoing support and marketing costs.

Royalty fees can be a percentage of your gross sales or a fixed amount, varying from the franchisor to franchisor. For example, some franchises may charge a 5% royalty fee while others may charge a $500 per month royalty fee. The critical thing to remember is that you will be responsible for paying these fees regardless of whether or not your business is profitable.

That alone really answers the questions of “How Do Franchisors Make Money”  with their business model.

In addition to franchise fees, many franchisors also require their franchisees to purchase supplies and inventory from them at an agreed-upon price. This is known as a mandatory purchase agreement, ensuring that the franchisor has a steady stream of revenue even if its franchisees are not doing well financially.

While mandatory purchase agreements can benefit both parties, they can also be challenging to get out of if you no longer want to operate your franchise.

Advertising and Marketing

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How Do Franchisors Make Money with Advertising and Marketing?

For a franchisor to make money, they need to generate interest in their franchise opportunity. This is typically done through advertising and marketing initiatives. By investing in marketing and advertising, the franchisor can reach a wider audience of potential franchisees.

There are many different ways to advertise and market a franchise opportunity.

Some standard methods include:

-Paid advertising (television, radio, print, online)
-PR/media relations
-Social media
-Direct mail
-Franchise exhibitions and trade shows

The goal of all these marketing efforts is to generate leads – people who are interested in learning more about the franchise opportunity. Once a piece of information is developed, it’s up to the franchisor’s sales team to close the deal and get them signed as a franchisee.

Typically franchising opportunities will provide you with marketing but at the same time many do not provide the marketing.

Training and Support

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How Do Franchisors Make Money through Training and Support?

Franchisors make money by charging a franchise fee to new franchisees and collecting royalties from franchisees on an ongoing basis. The franchise fee is a one-time charge paid by the franchisee to the franchisor when they sign the franchise agreement. The royalties are typically a percentage of the franchisee’s sales. They are delivered to the franchisor on a monthly or quarterly basis.

In addition to the fees collected from franchisees, franchisors also earn revenue from selling franchise rights to third parties, such as development companies and Area Representatives. Franchisors may also generate income from training and support services to their franchisees. These services can be charged on a per-session basis or as part of an annual service contract.

Other Sources of Revenue for Franchisors

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Other sources of revenue for franchisors come from the sale of products and services to franchisees, as well as from royalties and fees paid by franchisees. Franchisors may also earn income from the sale of franchises themselves.

Conclusion

So, How Do Franchisors Make Money? By charging a franchise fee to each new franchisee and royalties based on a percentage of the franchise’s sales. Additionally, many franchisors also offer marketing and advertising support to their franchisees, which can be a significant source of revenue.

Overall, franchisors make money by selling franchises and collecting fees and royalties from their franchisees. While some up-front costs are associated with starting a franchise, the long-term potential for profitability makes franchising an attractive option for many entrepreneurs.

Suppose you are looking into getting into franchising at Cypher Law. In that case, we can help guide you throughout the process alongside helping you make the best legal decision you need in your best interest!

Reach out to us today for more information.

Phone: 289-816-CYPR (2977)
Fax: 289-312-CYPR (2977)

Email: sanchita@cypherlaw.ca

Office: 755 Queensway East, Suite 202, Mississauga, ON

Read about How to become a franchisor in Canada here.

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